BOSTON (Dow Jones) - Owning 5% or more of NYSE Group Inc. shares could spell trouble for firms that sell mutual funds because it potentially could prevent their funds from executing trades via the Big Board without Securities and Exchange Commission approval, an advocate for fund shareholders said Tuesday.

The NYSE late Tuesday said it completed its merger with Archipelago Holdings Inc., (AX) an electronic rival. Trading of NYSE Group stock is set to begin Wednesday. That means that firms like fund giant Fidelity Investments and Goldman Sachs Group Inc. could own shares.

Goldman (GS), an investment bank that also offers mutual funds, owned more than 15% of Archipelago shares as of Dec. 31 .

Mercer Bullard, founder and president of Fund Democracy, a non-profit organization that fights for fund shareholders, said if a company has an ownership stake in a trading system, it has an incentive to direct trades to it.

"It's clearly a conflict of interest, the question is whether it's going to be subject to the rule for affiliated brokers or whether it would be just prohibited outright as a joint transaction," Bullard said. "If it is a joint transaction, they simply could not send trades to the New York Stock Exchange without SEC approval."

Companies that have both a fund family and a brokerage are permitted, with certain restrictions, to conduct fund portfolio trades through their own brokerages under SEC rules governing affiliated transactions, he said.

"Technically, an exchange is not a broker, so they wouldn't be able to rely on that exclusion from the affiliated transaction prohibitions," the advocate, a former assistant chief counsel in the SEC's division of investment management, said.

Bullard said he views a situation where a company owning at least 5% of NYSE Group that had mutual funds that traded through the exchange as potentially a joint transaction. As such, it would be prohibited under Section 17 of the Investment Company Act of 1940, which governs mutual funds, unless an exemption is granted, he said.

The advocate said he suspects the SEC would likely take the position that as long as the fund is being charged the same fees that the NYSE charges other customers, no problem would exist.

"And that ignores the possibility that they will send a lot more trades to the New York Stock Exchange than they otherwise would send," Bullard said. "If I were a mutual fund manager that owned 5% of the New York Stock Exchange, I'd want to know what the SEC thinks of the permissibility of the fund continuing to use the exchange."

SEC spokesman John Heine declined to comment Tuesday.

Ed Canaday, a Goldman spokesman, said the company has "examined the question, and we believe this won't be an issue." (END) Dow Jones Newswires 03-08-06 0447ET Copyright (c) 2006 Dow Jones & Company, Inc.